I’ve just had my attention drawn to the report on changes to bank capital requirements (Basel III and the European Commission’s CRD IV work) issued by the ECON committee of the European Parliament. This is hugely positive in terms of what I have previously referred to as ‘the elephant in the room’ in the battle over the regulation of OTC derivatives.

The ECON document clearly argues in support of the point the EACT and European corporates have been stressing: which is that future new capital requirements must not have the economic effect of reversing the likely favourable treatment of non-financial end users’ OTC derivative transactions (favourable in that they will not be forced into central clearing). There had been considerable talk on the part of the European Commission about ensuring that if corporates obtained an ‘exemption’ from the general thrust of the OTC regulatory proposals this would be addressed by ‘punitive’ capital requirement

With all respect to my friends in the Commission, this brave but aggressive talk appears to be being rejected by ECON on behalf of the Parliament; thank goodness for commonsense. The relevant wording of the ECON report is: “[we] call for different capital treatment for an OTC transaction and a transaction through a central counterparty (CCP), provided that the CCP meets high-level requirements to be defined in European legislation while taking into account standards agreed at international level, with due regard for the potential costs for the corporate sector of using derivatives to hedge its commercial activities”.

The significance of this very positive outcome is that it represents the first confirmation I at least have seen that there is acceptance within Brussels of the economic lunacy implicit in failing to be joined-up in the EU’s approach to derivatives and bank regulation. It cannot be good for Europe to give away with one hand the concession in derivatives regulation and then sit idly by whilst the banking regulatory changes driven by the BIS are used to reverse the derivatives outcome.